The time to consider buying a stock is when it looks oversold. In a post global financial crisis world, investors are tending to sell stocks on a mere hint of bad news and perhaps asking questions later. With investor focus skewed heavily towards resources, other companies are struggling for attention. Two analysts have indentified six stocks they believe offer solid long-term prospects, and are poised to benefit from more or closer investor focus. Don’t expect overnight results, but analysts have based their choices on the company’s business, past performance, management quality and outlook.  

Toll Holdings (TOL)     

Chart: Share price over the year to 15/04/2011 versus ASX200 (XJO)

As one of the Asian region’s leading transport and logistics providers, Richard Batt, of Shadforth Financial Group, says the strength of Toll Holdings lies in earnings diversity from multiple sources. In its half year report to December 31, 2010, the company reported revenue growth of 28 per cent to $4.2 billion and an 18 per cent increase in NPAT (net profit after tax) to $173 million. “This was primarily driven by a thriving resources sector, but potentially better numbers were held back by an ailing retail sector where consumer demand remains inconsistent,” he says. “We don’t see the resources sector slowing.” Toll recently announced the acquisition of Western Australia’s second largest mining services provider Mitchell Corp for $110 million, which supplies transport and logistics services to and from mining sites in WA. Batt says the acquisition provides TOL with a strategic market position in a growth sector. Toll’s share price close of $5.70 on April 13, 2011 is significantly off its 12-month high of $7.54 in April last year. Batt says increasing exposure to the resources sector should provide earnings upside amid a forecast fully-franked dividend yield of 4.7 per cent for 2012. “It’s an ideal stock for long term portfolios,” he says.

QBE Insurance (QBE)

Chart: Share price over the year to 15/04/2011 versus ASX200 (XJO)

Note: QBE Insurance was featured as “Stock of the Week” in TheBull PREMIUM 13/3/2011, when it was trading at $17.17. As of Friday the share price had risen 8.1 per cent to $18.56. Analyst Richard Batt still sees this as a solid long-term play.

Batt says the track record of QBE Insurance demonstrates management’s undeniable ability in underwriting risk at an effective and profitable price. “The company’s strategy of diversifying has been fundamental to its success,” he says. The company’s share price has retreated from a high of more than $22 a year ago to close at $18.54 on April 13, 2011. QBE booked a net profit after tax of US$1.28 billion for the 12 months to December 31, 2010, down 17 per cent on the previous year, which Batt says was mostly due to low interest rates, subdued equity markets, more catastrophes and a strong Australian dollar. But moving forward, Batt sees a brighter outlook as rising global interest rates over the medium term lift profitability. “The company has acquired several specialist underwriting agencies in Australia, the US and Europe to secure distribution channels and to further improve diversification, which should deliver well above average earnings growth and dividends,” he says. “It has a robust balance sheet to pursue more opportunities.”

Billabong International (BBG)

Chart: Share price over the year to 15/04/2011 versus ASX200 (XJO)

Note: Billabong was featured as “Dog of the Week” in TheBull PREMIUM 13/3/2011, when it was trading at $8.11. As of Friday the share price had dropped 11.6 per cent to $7.27. Analyst Richard Batt sees this as an opportunity to get in for the long-term.

Surfwear and sports apparel maker Billabong International has long been associated with strong brands, which Batt says has provided it with a competitive advantage. Batt says the company recently announced that it expects this year’s full year profit to fall between 2 and 6 per cent on last year due to the Japanese earthquake hurting sales. “Post the announcement, the share price fell to a 12-month low of $7.18 on April 12, 2011, down more than 40 per cent from its 12 month high of $12.32 in April last year,” Batt says. But, he says, the most crucial earnings driver is its retail owned stores in Australia and North America. The US economy is recovering, with Billabong indicating improving sales, driven mostly by its acquisition of West 49. Batt says the ability of Billabong management to generate brand appeal, via robust marketing campaigns and international distribution channels, presents strong sales opportunities in Europe.

Qantas (QAN)

Chart: Share price over the year to 15/04/2011 versus ASX200 (XJO)

Airlines are tough businesses to run at the best of times, but Qantas remains one of the most resilient and profitable in the world. While other airlines across the world failed in response to the global financial crisis and other catastrophes, Qantas continues to overcome challenges. It booked an underlying profit before tax of $417 million for the half year to December 31, 2010. Revenue was $7.6 billion. The share price retreat to a 12-month low of $2.05 in March 2011 was way over done, according to Steven Hing, general manager of Zodiac Securities. It has recovered marginally, but Hing believes there’s more upside ahead as it was trading at almost $2.90 in November, 2010. Hing says investors lost confidence in Qantas stock after several aircraft maintenance issues, including engine failure on a A380 plane from Singapore. However, Hing says passenger numbers have been improving and holding despite natural disasters and global hot spots. He says Qantas recently cut costs and is able to cover rising crude oil by lifting its fuel levy. In any case, Hing says the company has mostly hedged its 2010/11 fuel costs.

Downer EDI (DOW)

Chart: Share price over the year to 15/04/2011 versus ASX200 (XJO)

The Waratah project in New South Wales has cost Downer Edi dearly through delays in delivering trains and cost blowouts. The company recently raised $250 million to shore up its balance sheet. Downer is disputing $154 million in penalties for delays, and Hing believes there’s a chance of success. Irrespective of the outcome, Hing says Downer, as an engineering services company, offers viable businesses that should benefit from the mining boom.  Hing says this company is resilient as shown by its strong underlying businesses meeting challenges in the past. Bluntly, he says: “This company has other businesses besides trains.” On April 4, 2011, Downer announced it had been awarded a $60 million contract by OneSteel Manufacturing to construct an iron ore beneficiation plant in Iron Baron, South Australia. On March 31, 2011, Downer announced it had secured contract revenue worth $140 million involving road design and maintenance.

Extract Resources (EXT)

Chart: Share price over the year to 15/04/2011 versus ASX200 (XJO)

Investors wasted no time punishing uranium stocks following the Japanese earthquake and the subsequent radiation fallout from the Fukushima Nuclear Plant. Despite the tragedy, nuclear power remains a viable energy alternative as so many countries rely on it for power amid plans to build new reactors across the world. The question is do you believe uranium has a future? Hing does. He believes the Japanese tragedy paves the way to buy oversold uranium stocks. Extract Resources tops Hing’s list of value uranium buys. It closed at $8.35 on April 13, 2011, a far cry from its 12-month high of $10.80. Extract Resources is stgeloping a uranium project in Namibia. According to Extract Resources, a successful exploration program has defined a JORC-compliant indicated mineral resource of 257 million pounds of uranium oxide and an inferred resource of 110 million pounds. It plans to produce 15 million pounds of uranium oxide a year. Hing concludes that uranium demand is unlikely to fall and Extract, while offering a bright outlook, is a speculative buy for those who believe in the uranium story.

TOLL HOLDINGS (TOL) $7.54 $5.69
QBE INSURANCE (QBE) $22.22 $18.56
BILLABONG INTL. (BBG) $12.32 $7.27
QANTAS (QAN) $3.02 $2.13
DOWNER EDI (DOW) $7.35 $3.53


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